Demystifying Legal Entity in Oracle Fusion

Legal Entity is a recognized party in an organization with right and responsibilities given by the legislation. A Legal Entity has the right to:

  • Own properties
  • Right to trade
  • Responsibility to repay debts
  • Responsibility to account for themselves to regulators

You have to define Legal entity for each of the registered companies recognized in law. A legal entity is basically a separate legal identity or in other words, it’s an artificial person that conducts the business for the following reasons:

  • Comply with corporate taxation within local jurisdictions
  • Isolation of one area of business from risks into another area

So, if an organization involved in different types of business activities of procuring and selling, the activities will take place at legal entity level or in the context of legal entity. Because they are registered with authorities. So a legal entity is authorized by those authorities to perform these type business activities on a day to day basis.

Organization Structure

The most common issue faced by most of the businesses and consultants is the Organization structure design. In majority of implementation, the main objective is to make ensure that the structure should compliant from legal perspective and not putting equal attention to make system effective from operational management and accounting perspective, which is the most prevalent reason that most of the implementation projects forced to redesign the organization structure due to various issues they face during the transactional data recording and reporting. Legal entity is the crux of the organization structure as this determines the statutory and country specific (local) reporting needs.

Legal Entity is a juristic person that can enter into contracts, own assets and bank accounts, pay debts, file returns, perform statutory reporting, comply with legal requirements etc. In other words, legal entity is a business entity that is known to exist to the outside world. Internal organizations or divisions are not legal entities themselves, but are just part of it.

The fusion architecture deploys the one-on-one and many-to-one relationship between business unit and legal entity, thereby bringing about the true picture of business unit as a division or mechanism to restrict access and deploy other sub-ledger level controls as opposed to a legal entity that needs to perform statutory & tax reporting. In the fusion architecture, various legal entities could share the same ledger and consequently the same business unit. Both legal entities and business units are associated with the ledger and the relationship between the legal entity and business unit is derived based on the ledger.

If no sub-ledgers are required for a ledger (Eg: Consolidation ledger), there isn’t a need to assign any legal entity to the ledger. So the focus of the Legal entity is more external facing while the other internal reporting entities could be configured as separate balancing segment values within the same legal entity. The structure also provides platform for enhanced intercompany accounting.

Some of the major benefits that could be realized from the fusion Legal entity structure are summarized below:

  • Improved tracking of sub-ledger transactions at legal entity level
  • Simplified statutory compliance by leveraging advanced features
  • Enhanced tax reporting
  • Enhanced audit trail, compliance and control
  • Scalable platform for future initiatives
Legal Entity Relationships
Legal Entity in Transactions

Assets of the enterprise are owned by individual legal entities. Oracle Fusion Financials allow users to enter legal entities on transactions that represent a movement in value or obligation.

For example, the creation of a sales order creates an obligation for the legal entity that books the order to deliver the goods, and an obligation of the purchaser to receive and pay for those goods.

In another example, if you revalued your inventory in a warehouse to account for raw material price increases, the revaluation and revaluation reserves must be reflected in your legal entity’s accounts. In Oracle Fusion Applications, your inventory within an inventory organization is managed by a single business unit and belongs to one legal entity.

Legal Entity and Business Unit

A business unit can process transactions on behalf of one or many legal entities. In some cases the legal entity is explicit on your transactions. For example, a payables invoice has an explicit legal entity field. Your accounts payables department can process supplier invoices on behalf of one or many business units.

In some cases, your legal entity is inferred from your business unit that is processing the transaction, as each business unit has a default legal entity. For example, when a purchase order is placed in a business unit, the default legal entity is legally obligated to the supplier.

Legal Entity and Ledgers

To associate legal entity to the ledger, use the define accounting configuration task list, to specify which ledger a legal entity uses to perform the accounting transaction. You have the option to assign one or more legal entity to ledger using a task called assign legal entities. You can also assign balancing segment to legal entity using a task called assign balancing segment.

Now, you can also assign some balancing segment values to ledger also using the task called assign balancing segment values to ledger.  Balancing segment values assigned to ledger are basically representing the non-legal entity transaction such as adjustments.

Oracle recommended that you should assign balancing segment values to all the legal entities before assigning to the ledgers

Legal Entity and Balancing segments

Accounting for your business or operation means what? Accounting for your operations means you must produce a balanced trial balance sheet and other financial statements by legal entity.

Fusion supports up to three balancing segments. Best practices recommend that one of these segments represents the legal entity to ease the requirement to account for operations to regulatory agencies, tax authorities, and investors.

While transactions that cross balancing segments don’t necessarily cross legal entity boundaries, all transactions that cross legal entity boundaries must cross balancing segments.

Legal and Payroll Structure

While creating the legal entities, we have to identify them as legal employers and payroll statutory units, which make then available for use in Oracle Fusion Human Capital Management (HCM). Based on the organization structure we may have only one legal entity that is also a payroll statutory unit and a legal employer, or we may have multiple legal entities, payroll statutory units, and legal employers.

Legal Employer

A legal employer is a legal entity that employs workers. You define a legal entity as a legal employer in the Oracle Fusion Legal Entity Configurator.

The legal employer is captured at the work relationship level, and all employment terms and assignments within that relationship are automatically with that legal employer.

Legal employer information for worker assignments is also used for reporting purposes.

Payroll Statutory Unit

Payroll statutory units are legal entities that are responsible for paying workers, including the payment of payroll tax and social insurance. A payroll statutory unit can pay and report on payroll tax and social insurance on behalf of one or many legal entities, depending on the structure of your enterprise.

Payroll statutory units enable you to group legal employers so that you can perform statutory calculations at a higher level, such as for United Kingdom (UK) statutory sick pay. In simple cases, a legal employer is also a payroll statutory unit. However, in complex business scenario your organization may have several legal employers under one payroll statutory unit.

Tax Reporting Unit

Use a tax reporting unit to group workers for the purpose of tax and social insurance reporting. A tax reporting unit is the Oracle Fusion Human Capital Management (HCM) version of the legal reporting unit in Oracle Fusion Applications.

To create a tax reporting unit, you use the Oracle Fusion Legal Entity Configurator to define a legal entity as a payroll statutory unit. When you identify a legal entity as a payroll statutory unit, the application transfers the legal reporting units that are associated with that legal entity to Oracle Fusion HCM as tax reporting units. You can then access the tax reporting unit using the Manage Legal Reporting Unit HCM Information task.

If you identify a legal entity as a legal employer only, and not as a payroll statutory unit, you must enter a parent payroll statutory unit. The resulting legal reporting units are transferred to Oracle Fusion HCM as tax reporting units, but as children of the parent payroll statutory unit that you entered, and not the legal entity that you identified as a legal employer.

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